Today we are going to look at Thermon Group Holdings, Inc. (NYSE:THR) to see whether it might be an attractive investment prospect. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Thermon Group Holdings:
0.075 = US$44m ÷ (US$647m – US$60m) (Based on the trailing twelve months to December 2019.)
So, Thermon Group Holdings has an ROCE of 7.5%.
View our latest analysis for Thermon Group Holdings
Is Thermon Group Holdings’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Thermon Group Holdings’s ROCE is meaningfully below the Electrical industry average of 10%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, Thermon Group Holdings’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
The image below shows how Thermon Group Holdings’s ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Thermon Group Holdings.
Do Thermon Group Holdings’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Thermon Group Holdings has total assets of US$647m and current liabilities of US$60m. As a result, its current liabilities are equal to approximately 9.4% of its total assets. Thermon Group Holdings has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.
What We Can Learn From Thermon Group Holdings’s ROCE
Thermon Group Holdings looks like an ok business, but on this analysis it is not at the top of our buy list. Of course, you might also be able to find a better stock than Thermon Group Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Thermon Group Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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